CHAPTER I INTRODUCTION AND BACKGROUND

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1.1 Introduction Emerging business scenario opens up wide range of investment avenues like bank deposits, company fixed deposits, securities, bonds debentures, mutual funds, bullion, real estate etc. Among all these investments, mutual fund industry in India has overridden most other investment avenues yielding high returns and capital appreciation. Efficient portfolio allocation can contribute significantly to the investor returns in mutual funds. Portfolio management and its strategies are essential to the better performance of funds. Portfolio management is a study and practice of different kinds of investments and how they can be selected and combined to bring a good return to the investor. There is a wide variety of securities which are available. An investor has to choose his investments carefully to suit his risk profile. Investment decisions can be made wisely after understanding the investment environment, the availability of choices, the influence of taxes, inflation and certain established theories. When a single security is analyzed, it is called security analysis. If securities are combined to blend together and give maximum returns, it is called portfolio management. 1.2 What is a mutual fund? 1. A trust which pools the savings of a number of investors who share a common financial goal. 2. Professional investment managers invest these funds in a way that helps investors achieve their goals. 1.3 Constituents of a mutual fund 1. Sponsor 2. Trustee 3. Asset management Company 4. Registrars and Custodians 2

The Portfolio Manager allows the investor to view and track his/her investments on an ongoing basis. It offers a wide variety of portfolio evaluation options: Snapshot, Gain/Loss, Year (High/Low), News & Opinion, Fundamental and Fund Performance. 1. Automatically updates current market values of stocks and funds through current prices. 2. Includes each investment's portfolio weighting 3. Enables manual/automatic updation of all kinds of transactions such as: Buy, Sell, Systematic Investment Plan, Systematic Withdrawal Plan, Dividends, Rights, Bonus and Splits. 4. Allows modification or deletion of any holding or transaction 5. Provides you with Return on Investment of your holdings 1.4 Advantages of a mutual fund 1. Professional expertise 2. Diversification of Risk 3. Convenience 4. Liquidity 5. Transparent and well regulated 6. Choice of products/schemes 7. One stop shop for investmen5t avenues 8. Tax-efficient Returns

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1.5 What to Look for in a Fund?

With so many funds across categories, it is difficult for an investor to decide what fund to buy. Choosing a mutual fund is not an easy task with so many funds. We think that the correct first step towards deciding is to decide on a way of deciding. Rarely do investorsnormal investors, who do something else for a living-have a systematic checklist of things that they should evaluate about a fund, which they are considering buying. Here's our blueprint for a structured approach to fund selection. There are four basic areas that you must evaluate in a fund to decide whether it's a good investment. Performance: Performance comparisons must be used only to compare the same type of fund. They are meaningless otherwise. Only when used within the same category of funds do performance numbers tell you anything at all. By the time you come to the stage when you are comparing performance numbers of different funds, you should already have a good idea of how much you will invest in that category. 1.6 Risk: Almost all investing is risky, at least those investments that get you any meaningful returns. In general it is said that the riskier a fund, the more its potential for earning high returns, at least most of the time. However, this is a simplified view that implies that a given amount of risk always gets you the same returns. This is simply not true because not all funds are equally well-run. The true measure of risk is whether a fund is able to give you the kind of returns that justify the kind of risk it is taking. Evidently, this is not as easy to measure as returns. There are a wide variety of statistical techniques that can be used to measure this, and we distil a combination of performance and risk measurement into the Value Research Fund Rating. When we say that a fund has a fiveor four-star rating, it means that the fund, compared to similar funds, performed better, given its risk level.

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1.7 Portfolio: Unlike performance and risk, portfolio is one of the 'internals' of a fund. It is internal in the sense that the result of good, bad or ugly portfolios is already reflected in the first two measures and it's perfectly OK for you to choose funds on the basis of those two measures alone without actually bothering about what they own. Our basic analysis of portfolios measures whether a fund (we are talking about equity funds here) holds mostly large, medium or small companies. It also looks at whether a fund prefers companies that may be overpriced but which are growing fast or whether it prefers low-priced stocks belonging to companies that are growing at a more gentle pace. For fixed income funds, an analogous analysis tells one whether a fund prefers volatile but potentially high return long-duration securities or stable and low return short-duration securities. Also, one can analyse whether a fund prefers safer (lower returns) securities or riskier (higher returns) securities.

1.8 Management: Fund management is a fairly creative and personality-oriented activity. This may not be true of some types of funds like shorter-term fixed-income funds and, of course, index funds, but equity investment is more of an art than a science. When you are buying a fund because you like its track record (and unless you can foresee the future, that's the only way to buy a fund), what you are actually buying is a fund manager's (or sometimes a fund management team's) track record. What you need to make sure is that the fund manager who was responsible for the part of the fund's track record that you are buying into is still there. A high-performance equity fund with a new manager is a like a new fund.

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1.9 Cost: While these are the four main points on which to evaluate a fund, there is one more factor that is becoming increasingly important and that is cost. Funds are not run for free and nor are they run at an identical cost. While the difference in different funds' cost is not large, these can compound to significant variations, especially for fixed income funds where the performance differential between funds is quite small to begin with. Even for equity funds, it may not be worth buying a higher cost fund that appears to be only slightly better than a lower cost one. Remember, there is no reason for one AMC to have much higher costs than others, apart from the fact that it wants to have a higher margin, or that it wants to spend more on things like marketing, which are of no relevance to you. If an AMC wants higher returns from its business, then it must justify it by giving you higher returns on your investments. 1.10 SBI Fund Management Today the fund house manages over Rs 16500 crores of assets and has a diverse profile of investors actively parking their investments across 30 active schemes. In 19 years of operation, the fund has launched 32 schemes and successfully redeemed 15 of them, and in the process, has rewarded our investors with consistent returns. Schemes of the Mutual Fund have time after time outperformed benchmark indices, honoured us with 13 awards of performance and have emerged as the preferred investment for millions of investors and HNI's. The trust reposed on us by over 3.5 million investors is a genuine tribute to our expertise in fund management. 1.11 Professional Approach in Fund Management at SBI Mutual Funds 1. Funds managed by professionals with adequate qualification and expertise 2. In-house research to aid the fund managers 3. Top management involved to guide the investment policy and fund house philosophy 6

4. Competitive performance resulting in constant improvement 5. portfolios and NAVs are disclosed at record timings 6. Lower costs for investors due to multiple choices for investors This project is an effort to scan through the strategies and trends behind the success story of SBI Mutual Funds over the years. Efficient fund allocation and the professionalism coupled with expertise seem to be the guiding force behind the marathon success of SBI fund house.

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CHAPTER II RESEARCH DESIGN

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2.1 Introduction There are theories galore about investment techniques. But ultimately what determines the success ratio is your ability to pick stocks which are going to be winners of the future. The more undervalued a stock is, the better its chances of doing well in future, provided the fundamentals are in place. The success of the funds depends on the efficiency of fund allocation. Optimization techniques are essential to realizing the proportionately higher returns. 2.2 Statement of the Problem Portfolio optimization is the deciding factor for the performance of the funds. SBI Asset management Company raises money from the investors and invest in group of assets to optimize the returns. Through optimization of portfolios, SBI Mutual Funds has led its different mutual fund schemes to higher rate of growth and superior returns over the years. The advanced strategies and tools of portfolio construction under different schemes adopted by SBI have met with significant success and have helped in optimizing the returns of the investors. Therefore the researcher finds interest in working further on the same line. 2.3 Objectives of the Study 1. Identify the fund allocation strategies for optimum returns in mutual funds 2. identify the parameters of sectoral diversification in raising higher returns 2.4 Methodology of the Study Since it is difficult to cover the whole investment sector, SBI Mutual Fund was chosen as the field to do the study.

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2.5 Population Twelve existing SBI mutual fund schemes form the population of the study. Out of the twelve, five schemes have been selected as the samples for the study. They are: 1. Magnum Balanced Fund 2. Magnum Multiplier Plus Scheme 1993 3. Magnum Global Fund 4. Magnum Tax gain Scheme 1993 5. Magnum Contra Fund 2.6 Sample Convenient Sampling: Convenient sampling is a sampling technique by which researcher takes samples as per his convenience. 2.7 Sources of Data 2.7.1Primary data 1. Personal Interviews 2. Discussion with experts and management team 2.7.2 Secondary data 1. Company Annual Reports 2. Journals 3. Prospectus 4. Websites 5. Magazines

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2.8 Chapter Scheme

1. Introduction 2. Research Design 3. Profile of the Company/Organization 4. Analysis and Interpretation of Data 5. Summary of Findings, Recommendation and Conclusion 6. Bibliography 2.9 Scope of the Study

The project undertakes a comprehensive study on the different aspects related to portfolio optimization in mutual funds. The study is conducted in order to select few companies so that results cannot be generalized. 2.10 Limitations of the Study 1. The duration allotted for the completion of the project is insignificant. 2. Busy work schedule of the interviewees made data collection difficult 3. Unavailability of certain fundamental information from the company 4. The study was limited to SBI mutual funds and few other subsidiaries in Bangalore.

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CHAPTER III PROFILE OF THE INDUSTRY AND COMPANY

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3.1 Profile of the organization SBI Mutual Fund (SBI MF) is one of the largest mutual funds in the country with an investor base of over 3.5 million. With over 19 years of rich experience in fund management, SBI MF brings forward its expertise in consistently delivering value to its investors. Joint Venture SBI Funds Management Pvt. Ltd. is a joint venture between 'The State Bank of India' one of India's largest banking enterprises, and Socit Gnrale Asset Management (France), one of the world's leading fund management companies that manages over US$ 330 Billion worldwide. Turnover Ratio Today the fund house manages over Rs 16500 crores of assets and has a diverse profile of investors actively parking their investments across 30 active schemes. In 19 years of operation, the fund has launched 32 schemes and successfully redeemed 15 of them, and in the process, has rewarded our investors with consistent returns. Schemes of the Mutual Fund have time after time outperformed benchmark indices, honored us with 13 awards of performance and have emerged as the preferred investment for millions of investors and HNI's. The trust reposed on us by over 3.5 million investors is a genuine tribute to our expertise in fund management. SBI Funds Management Pvt. Ltd. serves its vast family of investors through a network of over 82 collection branches, 26 Investor Service Centers, 28 Investor Service Desks and 52 District Organizers. Advantages of Using Portfolio Management Service (PMS) at SBI MF 1. Lower cost as compared to a mutual fund

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2. Tailor-made solutions & services 3. Detailed analysis and review of your portfolio 4. Privileged access to the Fund Manager 5. Regular Reporting and communications 6. Control of Portfolio is ultimately in the Client's hands. The Approaches in Portfolio Management at SBI MF A. Expertise 1. Extensive Fund Management Expertise 2. Managing a wide variety of Schemes B. Professionalism 1. A strong partnership with a Global Asset Manager (SGAM) 2. Bringing the best practices in terms of portfolio management, services and risk control 3. Allows a fast access to innovative products. C. Safety and Reliability coming from a SBI group company Strengths and Value Addition at SBI Mutual Funds 1. Proven Skills in Wealth Generation. SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation. The fund traces its lineage to SBI - Indias largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronized by over 80% of the top corporate houses of the country.

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SBI Mutual Fund is a joint venture between the State Bank of India and Socit Gnrale Asset Management, one of the worlds leading fund management companies that manages over US$ 330 Billion worldwide. 2. Exploiting expertise, compounding growth In eighteen years of operation, the fund has launched thirty-two schemes and successfully redeemed fifteen of them. In the process it has rewarded its investors handsomely with consistently high returns. A total of over 3.5 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs. Today, the fund manages over Rs. 16500 crores of assets and has a diverse profile of investors actively parking their investments across 30 active schemes. The fund serves this vast family of investors by reaching out to them through network of 100 collection branches, 26 investor service centers, 28 investor service desks and 52 district organizers. SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo.

3. Fund House Expertise The investment environment is becoming increasingly complex. Innumerable parameters need to be factored in to generate a clear understanding of market movement and performance in the near and long term future. At SBIMF, we devote considerable resources to gain, maintain and sustain our profitable insights into market movements. We consistently push the envelope to ensure our investors get the maximum benefits year after year.

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Our expert team of experienced and market savvy researchers prepare comprehensive analytical and informative reports on diverse sectors and identify stocks that promise high performance in the future. This team works in tandem with a compliance and risk-monitoring department, which ensures minimization of operational risks while protecting the interests of the investors. Quite naturally many of our equity funds have delivered consistent returns to investors and have repeatedly out performed benchmark indices by wide margins. 4. Risk Management Chief Risk Officer (CRO). A Risk Management Committee, comprising the MD, Deputy CEO, CRO, COO, CIO and the CMO meets on a regular basis to manage risk within the organization. The Risk Management unit is a separate division within the organization headed by the The CRO is responsible for risk management over all the functions within the organization including Investments, Marketing, Operations, etc. Currently, the CRO is an experienced investment professional and is assisted by a two-member team, one being an investment Professional with an MBA in Finance and the other being an investment professional deputed from SGAM.

3. Achievements SBI Fund provides investors with the right schemes to secure their financial goals. SBI Mutual fund constantly strive to gain, maintain and sustain our profitable insights into market movements. This is to ensure that SBI Mutual Fund optimizes the investors returns and add value to their investments. The genuine tributes to SBI expertise in fund management are the awards that SBI Mutual Fund continues to win from the industry. SBI Mutual Fund won 3 awards

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each at the ICRA Mutual Fund Awards 2007 and Lipper Awards 2007 held last month. This is in addition to the 6 Awards it won in February 2007 including Mutual Fund of the Year 2007 from CNBC TV-18 Crisil. SBI Mutual Fund continues to be one of the premier fund management houses in the country managing assets of Rs 16807 crores (as on March 31, 2007). SBIs commitment to provide unparalleled service to the investors remains firm.

Sectoral Diversification of Funds Equity Fund The investments of these schemes will predominantly be in the stock markets and endeavor will be to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However they are also exposed to the volatility and attendant risks of stock markets and hence should be chosen only by such investors who have high risk taking capacities and are willing to think long term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in various stocks across different sectors while Sectoral funds which are specialized Equity Funds restrict their investments only to shares of a particular sector and hence, are riskier than Diversified Equity Funds. Index Funds invest passively only in the stocks of a particular index and the performance of such funds move with the movements of the index. Following are the Index Funds covered by SBI.1. 2. 3.

Magnum COMMA Fund Magnum Equity Fund Magnum Global Fund Magnum Multicap Fund Magnum Multiplier Plus

4. Fund Magnum5. 6.

7. 7.Magnum Sector Funds Umbrella 18

MSFU - FMCG Fund MSFU - Emerging Businesses Fund MSFU - IT Fund MSFU - Pharma Fund MSFU - Contra Fund

8. Magnum Tax Gain Scheme 1993 9. NFO - SBI Infrastructure Fund - Series I 10. SBI Arbitrage Opportunities Fund 11. SBI Blue chip Fund 12. SBI ONE India Fund

Debt Funds

Debt Funds invest only in debt instruments such as Corporate Bonds, Government Securities and Money Market instruments either completely avoiding any investments in the stock markets as in Income Funds or Gilt Funds or having a small exposure to equities as in Monthly Income Plans or Children's Plan. Hence they are safer than equity funds. At the same time the expected returns from debt funds would be lower. Such investments are advisable for the risk-averse investor and as a part of the investment portfolio for other investors. 1. Magnum Childrens Benefit Plan 2. Magnum Gilt Fund

Magnum Gilt Fund (Long Term) Magnum Gilt Fund (Short Term)

3. Magnum Income Fund 4. Magnum Income plus Fund

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Magnum Income Plus Fund (Saving Plan) Magnum Income Plus Fund (Investment Plan)

5. Magnum Insta Cash Fund 6. Magnum InstaCash Fund -Liquid Floater Plan 7. Magnum Institutional Income Fund 8. Magnum Monthly Income Plan 9. Magnum Monthly Income Plan Floater 10. Magnum NRI Investment Fund 11. SBI Debt Fund Series SDFS 15 Months Fund SDFS 90 Days Fund SDFS 13 Months Fund SDFS 18 Months Fund SDFS 60 Days Fund SDFS 180 Days Fund SBI Premier Liquid Fund Balanced Funds Magnum Balanced Fund invests in a mix of equity and debt investments. Hence they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but is looking for higher returns than those provided by debt funds. 1. Magnum Balanced Fund 2. Magnum NRI Investment Fund Flexi Asset Plan 20

Conclusion SBI Mutual Fund has made a positive impact among the asset management companies across the country over a decade. Touch of professionalism and rich expertise has proved significant to the growth of this asset management company. Efficient team work has made the resource allocation possible to a great extent.

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CHAPTER IV ANALYSIS AND INTERPRETATION

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4.1 Introduction

It has been found that some equity funds lag the others. That too within the same fund house. While at the top, the chief Investment strategy for the fund house, it is the fund manager that does the actual stock picking. And however rigid the stock picking process may be, performance does differ based on conviction levels and fund managers ability to spot winners. 4.2 Prominent Fund Houses in India I am trying here to fish out 12 leaders and the laggards amongst the equity diversified fund category from the same fund category from the same fund houses. It is based on quarterly return for the period Jan 04 to April 07, wrapping a period of 13 quarters. The returns of these funds was compared vis--vis the performance of its fund categoryEquity Diversified for each quarter of the defined period and each time a fund superseded the performance of its category, it earned itself one point. The highest and the lowest fund scores from each of the selected fund scorers from each of the selected fund houses (AMC) were virtually tagged as leaders and laggards, respectively. The analysis of these 12 funds of the six prominent fund houses shows that there is thin line which demarcates the leaders and laggards. It is mainly influenced by the portfolio composition and the investment strategy adopted by these funds. Though each of these funds trace to same family, their distinguishing feature lines in their focus towards a peculiar class of stocks say, the large caps, mid caps etc. it is interesting to note that over the long term the funds which have bestowed higher emphasis on the mid cap stocks have managed to out perform those which have diligently relied on the blue-chip scripts. Reliance Growth and Vision, the two funds of the Reliance Capital Asset Management, both launched in October 95 have scored 13 and 8 points respectively. A birds eye view of their portfolio composition shows that while the Vision scheme of this company has invested nearly 60% in large caps and 40% in mid caps stocks, the growth schemes 23

portfolio has shown a major inclination towards the mid cap stocks with nearly 80% of its assets invested in the stocks of mid cap companies. Reliance Growth has been a consistent performer on an overall basis followed closely by magnum Global which has scored 12 points in this review. In the SBI Magnum family, the younger sibling global as defeated the elder one, equity, by a margin of six points. Magnum equity, which was launched in November 90, holds a portfolio composition ratio of 40:60 towards the large and mid cap stocks respectively while magnum global, launched in September 94, proactively leans towards the mid-caps with merely 94% of its portfolio comprising of the Mid cap stocks. The scenario at the Franklin Templeton is no different either. While Frankline India Prima plus having a portfolio composition of 70:30 in favor of large and mid cap stocks respectively scored 10 points. Franklin India Blue chips, True to its name, having 95% of its portfolio composed of the large cap blue chip stocks, scrod 6 points. It is quite possible that in this exercise oranges are nor been compared with oranges. Some might have ostensibly a large cap flavor while other might follow a mid cap strategy. But then if one were to club them under diversified equities, you see the siblings arent as similar as they might seem to be. 4.3Portfolio Management Process at SBI MF Investment management or portfolio managements is a complex activity which may be broken down into the following steps. 1. Specification of investment objectives The typical objectives sought by the investors are current income, capital appreciation, and safety of the principal. The relative importance of these objectives should be specified. Further, the constraints arising from liquidity, time horizon, tax, and special circumstances must be identified.

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2. Choice of the asset mix The most important decision in portfolio management is the asset mix decision. This is concerned with the proportion of stocks and bonds in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor. 3. Formulation of portfolio strategy Once a certain asset mix is chosen, an appropriate portfolio strategy is to be has to be hammered out. The two broad choices are available: an active portfolio strategy or passive portfolio strategy. An active portfolio strategy strives to earn superior risk adjusted returns by resorting to market timing, sector rotation, or security selection, or some combination of these. A passive portfolio strategy involves a holding a broadly diversified portfolio and maintaining a pre-determined level of risk exposure. 4. Selection of Securities Investors pursue an active stance with respect to security selection. For stock selection, investors should go by fundamental analysis and technical analysis. The factors that are considered in selecting bonds are yield to m maturity, tax shelter and liquidity. 5. portfolio execution This phase is concerned with implementing the portfolio plan by buying or selling specified securities in given accounts. This has an important role in bearing investment results.

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6. Portfolio revision The value of a portfolio as well as its composition the relative proportion of stocks and bond components may change as stocks and bonds fluctuate. Periodical rebalancing of the portfolio is required due to the market volatility. It may also call for sector rotations well as security switches. 7. Performance Evaluation The performance of the portfolio should be evaluated periodically. He key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. This will provide useful feedback to improve the quality of the portfolio management process on a continuing basis. Classic features in SBI fund management Proven Wealth Creator Well Defined Investment Process Strong Equity Management Team Best in Class Performance Track Record The Most Preferred Fund House Risk return profile is balanced by investing in: 1. Sectoral funds 2. Equity Funds 3. Balanced Funds 4. Debt funds 5. Liquid Funds

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Portfolio construction involves the following steps: Selection of Investment assets Determination of diversification level Consideration of investment timing Allocation of investible wealth to investment assets Evaluation of portfolio for feedback SBI Mutual funds have the following securities to offer to the investors: 1. Growth funds that focus on stocks that may not pay a regular dividend but have the potential for large capital gains 2. Gncome funds which invests in stocks that pay regular dividends 3. Index funds, which aim to achieve certain regular, as a particular market index, such as the S&P 500 Composite Stock Price Index, by investing in a representative sample of the companies included in an index. 4. Sector fund may specialize in a particular industry segment, such as software technology or automobile industry stocks. 4.3 Risk Management SBI mutual fund has a well crafted risk management strategy to counter the unforeseen market conditions. The fund pick is done only after making solid fundamental and technical analysis of securities for a period of time. When the stock pick is done, certain criteria like company fundamentals, rating, promoters holding, intrinsic value etc are taken into consideration. Risk management strategies in SBI mutual fund include the following criteria for averting the anticipated and unanticipated risks.

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Context Investment risk is an inherent part of any business Identify risk tolerance levels Regulatory focus worldwide Ongoing move towards best practices Set up an effective risk management methodology To safeguard investor interest through investment risk analysis Identify and mitigate operational risk To identify potential business risks Strategies and Trends in Investing Investing is a complex exercise only because we insist on making it so. But the basic principles are simple. As simple that anyone can become a good investor just by following simple and easily understood rules, which also help avoid big mistakes. Here are my rules for investment success. Develop a Plan: For the short-term goals, make investor should be aware of taking appropriate risks. Invest money that investor will need in the next two years to five years in cash and short-term bonds, or pull back. There's no telling where the bottom of this market is. It's better to cut the losses and preserve the money one has for short-term goals. Keep It Simple: Buy a diversified equity fund or an index fund for equity exposure and a floating-rate bond fund for fixed income exposure. These are the basics of the investment world. Sure, you can buy many other types of funds (Petro, MNC, Gilt, Fixed Maturity, Serial Plans etc), but it's hard to go wrong with these two. To keep fund selection simple, 28

stick with a diversified equity funds of well-established fund families. Equities prove to be the best performing long-term asset class. Stay away from exotic speciality and sector funds, unless they have a huge risk appetite and one can take in your stride a 25% loss in a quarter. Ignore the hot stocks and funds: If one buys this year's top-performing fund or stock, be prepared to see it at the bottom next year. The fancy academic expression for this phenomenon is -- Reversion to the Mean. But the old saying explains it just as well -what goes up must come down. Invest Regularly: Investing a little bit of money each month is the surest way to reduce the risk of investing, because they lessen the possibility of buying at the market top. Also, no one is smart enough to anticipate all the moves, both up and down. Buy and Hold: Short-term trading makes more brokers than investors rich. The income tax department likes the practice, too. Start Early: It is not the "market timing" but time in the market that matters. Power of compounding will turn things in your favour. Investing is a long-term proposition. Research ones investments, remember your goals, re-examine your risk, and limit how much you listen to day-to-day market commentary. 4.4 Analysis of Selected Funds at SBI Mutual Funds SBI Mutual Funds have made a significant growth in the diversified portfolio construction. For sample study I have selected five award winning funds managed by SBI mutual funds. The study includes the investment objectives, mode of functioning, risk factors, portfolio holding of the funds for the quarter ended March 31, 2007. Their performance has been pointed in graphs and the variations are due to the market conditions.

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1. Magnum Global Fund

Investment Objective To provide the investors maximum growth opportunity through well researched investments in Indian equities, PCDs and FCDs from selected industries with high growth potential and Bonds. Asset Allocation In equity, partly convertible debentures, fully convertible debentures & bonds there is 80-100% allocation. Risk premium is medium to high here. In money market instruments, the allocation is 0-20 with low risk profile. Scheme Highlights An open-ended equity scheme investing in stocks from selected industries with high growth potential. 2. Minimum Investment Rs. 2000 and in multiples of Rs. 1000 with Dividend and Growth options available. ^ Money Market Instruments will include Commercial Paper, Commercial Bills, Certificate of Deposit, Treasury Bills, Bills Rediscounting, Repos, Government securities having an unexpired maturity of less than 1 year, call or notice money, and any other such short-term instruments as may be allowed under the regulations prevailing from time to time. Launch Date: September 30, 1994 Entry Load: Investments below Rs. 5 crores - 2.25% Investments of Rs.5 crores and above NIL

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Exit Load: Investments below Rs 5 crores 6 months but < 12 months - 0.50% Investments of Rs.5 crores and above NIL SIP Rs.500/month - 12 months Rs.1000/month - 6months Rs.1500/quarter - 12 months SWP Systematic Withdrawal Plan (SWP): A minimum of Rs. 500 can be withdrawn every month or quarter by issuing advance instructions to the Registrars at any time. There is also a facility of a Monthly Pension Plan, whereby investors can withdraw a minimum amount of Rs. 500/- every month.

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Magnum Balanced Fund Holding Lists for Quarter (Jan-Mar) 2007Table No. 4.6

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Magnum balanced Fund was trying to be risk averse by investing in a diversified portfolio by allocating in debt equity funds. Magnum balanced fund had a constant growth over a period of time. But now, the market volatility caused little downfall but is now catching up. Magnum Balanced-G Chart No.4.4

To summarise, we observe the diversification of portfolios into different segments like banking, engineering, real estate, FMCG, hospitality, automobile, telecom, consumer durables, cement etc. The success of SBI funds is due to its sectoral diversification. They have been structuring and restructuring the portfolio for the purpose of avoiding unforeseen impacts in the market.

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Portfolio OptimizationThe objective of this model is to learn how the Nobel Prize winning, Optimal Portfolio Theory (by Harry Markowitz), works in practice. Three stocks are used for this project. The efficient frontier for the three-stock portfolio is plotted on Figure 1. The three-stock portfolio possibilities space is derived by assigning different weights for each stock using a random number generator. The random number generator generated random numbers from 0 to 1. To ensure the sum of the three weights equal 1 and all three weights are positive numbers between 0 to 1, the following procedure is followed: Once the portfolio possibilities space is plotted , the optimal portfolio could be found by graphically determining the tangency portfolio consistent with the riskless interest rate. The riskless rate (the U.S. T-Bill rate can be used as a proxy) in this case was assumed to be 4%. The expected return and the standard deviation corresponding to the tangency were 12.5% and 20%, respectively. To let the computer select the optimal portfolio, the Sharpe Ratio is used. In this case, the portfolio corresponding to the largest Sharpe Ratio is the optimal portfolio. Four thousands (4,000) combinations are generated. The largest Sharpe Ratio is found to be 41.315%. The weights corresponding to this ratio are 17.30%, 42.81% and 39.88% for stocks 1, 2 and 3, respectively. The portfolio's expected return and standard deviation were 12.27% and 20.017%, respectively. Note that, for a 3 stock portfolio, 500 combinations would be enough to provide a very good estimate. To set the number of combinations, place the number on cells "E4" of the sheet "Input Sheet". To use this program, the user needs to create the following sheets: "Input Sheet" & "Output Sheet". The user may not need to set up the format as shown in Figures 2 and 3. For those sheets, however, it is very important that the inputs, stock variances, covariances, expected returns, risk free rate, and the number of iterations, be place in the same cell references as in Figure 2.

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Figure 2. sp2 = portfolio variance Wi = weight of stock i si2 = variance of stock i Rp = portfolio return sij2 = covariance of stock i and j Rf = risk free rate

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Optimal Portfolio Selection. Chart No.4.5

Risk Return Analysis chart No.4.6

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Optimal Allocation Table No. 4.7 STOCK OPTIMAL ITERATION SHARPE 4000 1 2 3 SUM CHECK 17.30 % 42.81 % 39.88 % 100. 00 % RATIO 0.41315 MEAN 0.12270 STANDARD DEVIATION 0.20017

PORTFOLIO OPTIMIZATION - Many Assets Suppose that a fund house had N risky assets, rather than just two risky assets. How can we calculate the Efficient Trade-Off Line and the Risky Asset Trade-Off Curve in this case? It turns out that it is much easier to handle N risky assets in a spreadsheet than any other way. The figure below shows the results of the N=5 risky assets case, including a bar chart of the portfolio weights of the optimal (tangent) portfolio.

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Table No.4.8 Portfolio Optimization - Many Assets.

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Chart No.4.7 Portfolio weights in an optimal portfolio

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Well Defined Investment Process SBI Mutual Fund has adopted a well crafted strategy of sectorial diversification of portfolios in order to take advantage of market volatility. It makes investments across regions including north, west, east and south. SBI has allocated nearly 260 stocks based on core competence of analysts. They involve technical and fundamental analysis. Fundamental Analysis Business Modelling Identification of differentiation strategy Relative rankings based on core strength Use of financial ratios & fundamental models Quantitative Screening Stock vs Sector Benchmarking Free Float Analysis Ownership Analysis, Market capitalisation Business description Competitive environment Management experience and track record Periodic portfolio review Review of sector weights Review of individual weights Taking into consideration all these aspects into mind in the company meeting, SBI goes into the making of portfolios and fund allocation to different schemes.

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Role of the Fund Manager at SBI AMC Fund managers are primarily responsible for the performance of mutual funds. However, very little is known as to how they decide their investments and disinvestments. So there is a need to focus on the empirical testing and hypothetical portfolios on the basis of ratios which fund managers use for portfolio formation. Fund managers rely primarily on financial statement analysis and key fundamental variables namely Book to market ratio and price Earning Ratio. For the analysis purpose, they use balance sheet, income statement, and profit after tax. Further, fund managers regarded financial risk, quality of disclosure in the annual report by the management, predictability of earnings and corporate growth prospects as the primary determinants of their decision making. Fund managers use Quality of Earning as a criterion for their planning methodology. All fund managers are not successful in the formation of the portfolio and so the study also focuses on empirically testing and form hypothetical portfolio on the bases of ratios, fund managers use for portfolio formation. Analysis of the relationship between stock returns and the fundamental variables is conducted at the portfolio level. Since the companies selected in the study have fiscal year that ends on 31st march, and practically all companies publish their financial statements within the next three months after the end of the first year. Accordingly the portfolios are formed on the basis of the fundamental variables known to investors by the end of June in each year. The Fund management at SBI operates on basic investment premise of Thorough Research Active Fund Management Proactive Risk Management Geared to maintain consistent top performance through An experienced 18 member Equity and Debt & Money Market Investment team

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Dedicated equity, debt and derivative dealing capability for delivering proper execution A 6-member risk management & compliance team to protect investor interest Extensive back office network to provide investor service across 70 locations

Portfolio Construction Methodology at SBI Mutual FundsFormation of Portfolio on the Basis of P/E Ratio To form the portfolios, the sample securities in every year are sorted in the ascending order on the basis of the P/E Ratio. The securities with negative P/E ratio are ignored as their earning per share wee negative and the rational investors would not invest in shares worth negative earnings. Then the ranked securities were classified into ten equal portfolios. First portfolio contains stock with the lowest 10% P/E ratio and the tenth portfolio contains stocks with highest 10 % QE Ratio. Each stock receives the same weight within the portfolio.

Formation of Portfolio on the Basis of QE RatioTo form the portfolios, the sample securities in every year are sorted in the ascending order on the basis of the QE ratio. The securities with negative QE ratio are ignored as their earning per share were negative and their rational investors would not invest in shares worth negative QE ratio. The ranked securities were then classified into ten equal portfolios. First portfolio constrains stocks the lowest 10 % QE ratio, while the tenth portfolio contains stocks with the highest 10% QE ratio. Each stock receives the same weight within the portfolio.

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Formation of Portfolio on the Basis of B/M RatioTo form the portfolios, the sample securities in every year are sorted in the ascending order on the basis of B/M ratio. The securities with negative B/M ratio as their normal book values were negative and their rational investors would not invest in shares with negative earnings. The ranked securities were then classified into ten equal portfolios. First portfolio contains stocks with lowest 10% B/M ratio, whole the tenth portfolio contains stocks with the highest 10%B/M Ratio. Each stock receives the same weight within the portfolio. Each of these portfolios may be viewed as a mutual fund policy of acquiring securities in a given range of a particular ratio on the ending period of June, holding then for a year, and then measuring the annual returns.

Methods of Measuring Risks and Returns in the PortfolioEvaluation of portfolio performance, the bottom line of the investing process, is an important aspect of interest to all the investors and money managers. The framework for evaluating portfolio performance consists of measuring both the realized return and the differential risk of the portfolio to compare a portfolios performance, and recognizing any constraints that the portfolio manger may face. Investing is always a two dimensional process based on return and risk. The two factors are opposite sides of the same coin and both must be evaluated if intelligent decisions are to be made. Therefore, if the risk of an investment is not known, then it is difficult to give judgment about its performance. Conclusion Given the risk that all investors face, it is totally inadequate to consider only the returns from various investment alternatives. Although all investors prefer high returns, they are also risk averse. To evaluate portfolio performance properly, it is essential to determine whether the returns are large enough given the risk involved.

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CHAPTER V SUMMARY OF FINDINGS, SUGGESTIONS AND CONCLUSION

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5.1 CONCLUSION Much of the credit for sustained performance of SBIMF goes to our team. They are the real performers whose expertise and capability rewards our investors. Quite naturally many of our equity funds have delivered consistent returns to investors and have repeatedly out performed benchmark indices by wide margins. A portfolio manager tracks and monitors investments, cash flow and assets, through price updates. Investments like equity, mutual funds, assets, cash flows, and borrowing funds is the work of the portfolio manager. It is the most up to date and precise indicator of net worth and investment at each stage. It can be used as a record of holdings to base any future investment decisions. The portfolio manager has useful tools to gain an insight of volatile market. This helps to track the trends of current investments and stocks. Most fund houses reiterate that they have process in place. But then it can never substitute stop picking skills-which differs from individual to individual. Under such circumstances, shadow fund managers are obviously the best bet. Fund houses such as Birla sun life have already tested it and have found themselves better equipped to counter equip fund manager exit. To sum up, fund managers are Human beings too cannot resist the prospects of higher salaries or better responsibilities. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs. Today, the fund manages over Rs. 16500 crores of assets and has a diverse profile of investors actively parking their investments across 30 active schemes.The fund serves this vast family of investors by reaching out to them through network of 100 collection branches, 26 investor service centres, 28 investor service desks and 52 district organisers. SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo. 60

5.2 FINDINGS The month of March saw a lot of fluctuations in the markets. Mid cap and small cap stocks continue to under-perform large caps for the second month in a row. Indias performance was in line with the Asian region but underperformed emerging markets for the second month in a row. While domestic demand continues to surge, export growth has not been upto mark leading to a sharp deterioration in the trade deficit. The Reserve Bank as well has been cautiously moving the repo rate up and would lead to tightening of short term interest rates. The resilience of retail investors entering equity markets through mutual funds continues. The industry has seen fresh investments mainly through Systematic Investment Plans (SIPs) or New Fund Offers (NFOs). The uncertainty in the markets is the main reason and investors need to learn that to build a sizable corpus, investments in equity should be for the long term. Hence SBI Fund can provide investors with the right schemes to secure their financial goals. SBI Mutual fund constantly strive to gain, maintain and sustain our profitable insights into market movements. This is to ensure that SBI Mutual Fund optimizes the investors returns and add value to their investments. The genuine tributes to SBI expertise in fund management are the awards that SBI Mutual Fund continues to win from the industry.

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5.3 SUGGESTIONS Portfolio management has become an inevitable element in the whole field of wealth management. It involves professional expertise and scientific approach to the profession of asset management. Value addition and capital appreciation are essential to keeping up the interest of the investors. SBI Asset Management Company has adopted an innovative methodology to counter the market fluctuations in bringing about good returns to the investors. The methodology adopted has been so crucial to the better performance of the company. At the completion of the project, the researcher would like to propose few suggestions and recommendation to the company. 1. Equity mutual funds will continue to beat benchmarks but they will not be able to do so with a huge margin as in the past. So the company needs to restructure the equity schemes and make more option for balanced schemes. 2. Many mid-cap funds have assets as big as large cap schemes. But liquidity in mid-caps is only about 16-17 percent of the large caps. Perhaps there needs to be more investments in mid-cap with growth prospects. 3. Index funds have performed better than actively managed ones in the US. But the situation is different in India. So the focus needs to be one equity funds, balanced funds, and debt funds. 4. Certain funds focus only on two or three factors like consumer discretionary, automobile, or hospitality. But diversification into five or six sectors can make funds risk averse.

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BIBLIOGRAPHY

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BIBLIOGRAPHY BOOKS 1. Investment Management, Preeti Singh, Tenth Edition, Himalaya Publishers, 2002. 2. Investment Analysis and Portfolio management, Prasanna Chandra, Second Edition, Tata McGraw Hill Publsiing Company, 2005. 3. Security Analysis and Portfolio Management, Donald E. Fischer, Sixth Edition, Prentice hall of India Pvt. Ltd, 2000. 4. Fundamentals of Investment, Gordon J. Alexander, Willaim F. Sharpe, 2002. 5. Investment Management, V A Avdhani, Fifth Edition, Himalaya Publishing House, 2003. 6. Modern Portfolio Theory and Investment Analysis, Edwin J. Elton, Fifth Edition, John Wiley & Sons, 2002. 7. Financial Institutions and Markets, L.M Bhole, Fourth Edition, McGraw Hill Companies, 2004. JOURNALS 1. The IFCAI Journal of Portfolio Management 2. Dalal Street 3. Business Today 4. Investnet, The Times Group 5. Fund Manager, Business Standard WEBSITES 1. www.sbimf.com 2. www.easymf.com 3. www.icicidirect.com 4. www.amfiindia.com 5. www.valuenotesonline.com

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